Patents

In 2012, the US Chamber of Commerce put out a report claiming that intellectual property is responsible for 55 million US jobs—46 percent of private sector employment. This is a ridiculous statistic if you merely stop and think about it for a minute. But the fact that the statistic is ridiculous doesn’t mean that it won’t continue to circulate around Washington. For example, last year Rep. Marsha Blackburn cited it uncritically in an oped in The Hill.

In a new paper from Mercatus (here’s the PDF), Ian Robinson and I expose this statistic, and others like them, as pseudoscience. They are based on incredibly shoddy and misleading reasoning. Here’s the abstract of the paper:

In the past two years, a spate of misleading reports on intellectual property has sought to convince policymakers and the public that implausibly high proportions of US output and employment depend on expansive intellectual property (IP) rights. These reports provide no theoretical or empirical evidence to support such a claim, but instead simply assume that the existence of intellectual property in an industry creates the jobs in that industry. We dispute the assumption that jobs in IP-intensive industries are necessarily IP-created jobs. We first explore issues regarding job creation and the economic efficiency of IP that cut across all kinds of intellectual property. We then take a closer look at these issues across three major forms of intellectual property: trademarks, patents, and copyrights.

I am speaking on a panel tomorrow at the Dirksen Senate Office Building at an R Street Institute event on patent reform. Here’s R Street’s description:

The patent reform debate has been painted as one of inventors vs. patent troll victims. Yet these two don’t have to be enemies. We can protect intellectual property, and stomp out patent trolls.

If you’re just tuning in, patent trolls are entities that hoard overly broad patents, but do not use them to make goods or services, or advance a useful secondary market. While there’s a place for patent enforcement, these guys take it way too far.

These entities maliciously threaten small businesses, inventors, and consumers, causing tens of billions in economic damage each year. Since litigation costs millions of dollars, businesses are forced to settle even when the claim against them is spurious.

Fortunately, with growing awareness and support, the patent trolls’ lucrative racket is in jeopardy. With Obama’s patent troll task force, the passage of the Innovation Act in the House, state legislation tackling demand letters, and further action in the courts, we appear to be closer than ever to achieving real reform.

Please join us for a lunch and panel discussion of the nature of the patent troll problem, the industries it affects, and the policy solutions being considered.

Today’s patent mess can be traced to a miscalculation by Jimmy Carter, who thought granting more patents would help overcome economic stagnation. In 1979, his Domestic Policy Review on Industrial Innovation proposed a new Federal Circuit Court of Appeals, which Congress created in 1982. Its first judge explained: “The court was formed for one need, to recover the value of the patent system as an incentive to industry.”

The country got more patents—at what has turned out to be a huge cost. The number of patents has quadrupled, to more than 275,000 a year. But the Federal Circuit approved patents for software, which now account for most of the patents granted in the U.S.—and for most of the litigation. Patent trolls buy up vague software patents and demand legal settlements from technology companies. Instead of encouraging innovation, patent law has become a burden on entrepreneurs, especially startups without teams of patent lawyers.

A system of property rights is flawed if no one can know what’s protected. That’s what happens when the government grants 20-year patents for vague software ideas in exchange for making the innovation public. In a recent academic paper, George Mason researchers Eli Dourado and Alex Tabarrok argued that the system of “broad and fuzzy” software patents “reduces the potency of search and defeats one of the key arguments for patents, the dissemination of information about innovation.”

Current legislation in Congress makes changes to patent trial procedure in an effort to reduce the harm caused by patent trolling. But if we really want to solve the trolling problem once and for all, and to generally have a healthy and innovative patent system, we need to get at the problem of low-quality patents, especially in software. The best way to do that is to abolish the Federal Circuit, which has consistently undermined limits on patentable subject matter.

We mine two underexplored traditions for insights into intellectual property: the public choice or Virginia school, centered on James Buchanan and Gordon Tullock, and the Bloomington or Institutional Analysis and Development school, centered on Elinor Ostrom and Vincent Ostrom. We apply the perspectives of each school to issues of intellectual property and develop new insights, questions, and focuses of attention. We also explore tensions and synergies between the two schools on issues of intellectual property.

The gist of the paper is that the standard case for intellectual property—that a temporary monopoly is needed in order to recoup the sunk costs of innovation or creation—ignores issues raised by the two schools we investigate.

From a public choice perspective, a temporary monopoly provides enormous opportunities for rent seeking. Copyright and patent owners are constantly manipulating the political environment to expand either the duration of the monopoly or the scope of what can be monopolized. We document the evolution of intellectual property in the United States from its modest origins to its current strong and expansive state.

From a Bloomington perspective, the standard case for IP wrongly treats the commons as a kind of wasteland. In fact, numerous innovations and sprawling creative works occur without monopolization—just look at Wikipedia. Innovation occurs when the right institutional structures are in place, and intellectual property that is too severe can hamper the smooth operation of these institutions. Too much IP can harm as much as too little.

The Hill is reporting that Rep. Goodlatte, under pressure from “companies like Microsoft, IBM and Apple,” is planning to drop the provision in his patent reform bill that expands the Covered Business Method (CBM) program. Mike Masnick also has commentary.

The “Covered Business Method Review” (CBM) was first introduced in 2011’s America Invents Act. It created, for a limited time, an additional avenue of patent review at the Patent Office. Unfortunately, as drafted, it really was only intended to apply to patents that deal with financial institutions.

CBM is a good program. First, we have long favored the use of Patent Office procedure to challenge patents; it is much cheaper and much quicker than going to court. Second, it allows for more ways to challenge patents than other types of Patent Office review—making it a more robust procedure that promises to knock out more improvidently granted patents. Third, it automatically puts concurrent patent litigation between the parties on hold.

Putting ongoing litigation on hold is no small thing. Patent litigation often costs each side well into the millions of dollars, while CBMs cost just a fraction of that. This means that more people will be in a position to challenge bad patents and fight back against the trolls who wield those patents.

The original Goodlatte bill would have expanded CBM review to patents beyond the financial sector.

From a public choice perspective, it is unsurprising that finance would have better patent law than the rest of the economy: finance is a concentrated industry that can go up politically against and offset another concentrated industry, the patent bar. But non-finance covered business method patents are asserted against all kinds of companies, for practices as banal as retrieving data from a database (not joking: “A method of retrieving information from a database record having plural fields“) or selling things online (“An apparatus to market and/or sell goods and/or services over an electronic network“). The fact that the victims of these patent assertions are dispersed throughout the economy means that they are not organized enough to effectively oppose the patent interests that are lobbying against the CBM program expansion.

Still, it is very disappointing that Rep. Goodlatte is caving to such lobbying. I already thought that his bill did not go far enough; now it goes even less far.

Last week, the FTC proposed to use its Section 6(b) power to investigate patent trolls. Its clear from the agency’s comment request that what they’re really interested in examining is the practice of patent privateering.

Because patent trolls are non-practicing, they are not subject to threats of counter-suit and mutually assured destruction. Because they are not members of any SSOs, they do not have any obligation to license on a FRAND basis; standard-essential patents can be transferred to privateers and then asserted against all users of the standard. And because the transfer of patents to patent trolls is often done through various shell companies or other shadowy means, the defendant and the public often cannot know on which practicing software company’s behalf the privateer is working. This means the defendant cannot retaliate through countersuits or a public relations offensive.

I think that understanding how patent privateering actually works and how it disrupts companies’ attempts to innovate makes one much more sympathetic to simply abolishing software patents outright. Given that the practice is not widely understood, the FTC could add value by simply disseminating information about it to a wider audience. I don’t think that the FTC has the authority to regulate patent enforcement, since patent rights are explicitly authorized by Congress, but they can and should send Congress the message that software patents are being used to stifle innovation, not promote it.

Randall Stross discusses his recent book: The Launch Pad: Inside Y Combinator, Silicon Valley’s Most Exclusive School for Startups. Stross’s behind-the-scenes look at Y Combinator details how the seed fund has been able to produce young entrepreneurs and successful startups such as Dropbox and Airbnb. Stross also discusses Y Combinator’s early history, the typical Y Combinator participant, the fund’s rate of return, the gender gap in the program, and the reason Silicon Valley has become the epicenter for startups.

Heightened Pleading: Requiring a patent holder to provide basic details (such as which patents and claims are at issue, as well as exactly what products allegedly infringe and how) when it files a lawsuit.

Fee shifting: Requiring the loser in a patent case to pay attorney’s fees and costs. This would make it harder for trolls to use the extraordinary expense of patent litigation to force a settlement.

Transparency: The draft includes strong language requiring patent trolls to reveal the parties that would actually benefit from the litigation (called the real party in interest).

Joinder: If the plaintiff is a shell-company patent troll, the defendant could require the real party in interest to join the litigation. Even better, a prevailing defendant could collect attorney’s fees from the real party in interest if the patent troll can’t or won’t pay.

Staying customer suits: Requiring courts to stay patent litigation against customers when there is parallel litigation against the manufacturer.

Discovery reform: Shutting down expensive and often harassing discovery until the court has interpreted the patent. This should make it easier for defendants to dispose of frivolous cases early before the legal fees and court costs really add up.

Post-grant review: The bill expands an important avenue to challenge a patent’s validity at the Patent Office (known as the transitional program for covered business method patents). While this procedure is still too expensive for many of the trolls’ smaller targets, we support efforts to make it easier to knock out bad patents.

Given the extent to which the problems with our patent system are caused by software patents, it is unfortunate that none of the patent reform bills under consideration in this Congress contemplate simply excluding software from the set of patentable subject matter. By all means, slay the trolls. But also go after the source of their power.

No doubt I won’t be the only one to point out how funny it is that today’s New York Timesfront page exposé on the excesses of the Renewable Fuel Standard puts the blame on Wall Street firms trading in the market for ethanol credits. But I also want to make a comparison to intellectual property.

As the headline puts it, “Wall St. Exploits Ethanol Credits, and Prices Spike,” Yet ethanol credits are a thing that affect the price of gasoline only because the government created them out of thin air and mandated their use. Having created a new commodity–and a mandatory one for many refiners–it’s no surprise speculators entered the market. Yet this is how the NYT describes it:

The banks say they have far less influence in the market than others are suggesting, and are doing nothing wrong. But the activities, while legal, could have consequences for consumers.

See that? It’s the perfectly legal activities of the banks that will have consequences for consumers. I’d say it’s the entire program itself, created out of thin air by the government, that allows for these activities in the first place.

Because Congress and the EPA didn’t accurately predict future gasoline consumption (shocker that) they set the amount of ethanol that refiners must blend into gasoline too high. Refiners are on the hook to use more ethanol than possible, which forces them to buy ethanol credits instead. So of course commodity speculators are going to play in this made-up market, but it’s not the players we should be hating, it’s the game.

And for the record, I don’t mean to excuse the banks. I don’t know enough about this issue, but it wouldn’t surprise me if the banks had a hand in getting the government to create this market. If they did, then that’s par for the crony capitalist course.

Sherwin Siy, Vice President of Legal Affairs at Public Knowledge, discusses emerging issues in digital copyright policy. He addresses the Department of Commerce’s recent green paper on digital copyright, including the need to reform copyright laws in light of new technologies. This podcast also covers the DMCA, online streaming, piracy, cell phone unlocking, fair use recognition, digital ownership, and what we’ve learned about copyright policy from the SOPA debate.